Workers Compensation System in Hawaii March 2008

Transcription

1 Workers Compensation System in Hawaii March 2008 Research and Economic Analysis Division Department of Business, Economic Development and Tourism STATE OF HAWAII

2 PREFACE This report is part of READ s efforts toward enhancing understanding of Hawaii s Economy through comprehensive research and analysis of current economic issues facing policymakers and business communities. The report was prepared by Drs. Binsheng Li and Khem Raj Sharma of Economic Research Branch, under the direction of Dr. Pearl Imada Iboshi, the Division Head. The authors are thankful to Gary Hamada and John P. Hardway of the Department of Labor Industrial Relations and J. P. Schmidt, Insurance Commissioner, for their constructive comments and feedback on the draft report. ii

3 TABLE OF CONTENTS PREFACE...ii LIST OF TABLES... iv LIST OF FIGURES... iv EXECUTIVE SUMMARY... v 1. INTRODUCTION DISCRIPTION OF WORKERS COMPENSATION SYSTEM AND COMPARISON OF BENEFIT LEVELS The Goals of the Workers Compensation System Description of the Hawaii Workers Compensation System and Comparison of Benefit Levels HISTORICAL PERFORMANCE Data and Measurement The Gap Between Employer Cost and Employee Benefit Comparison of Benefit Levels National Premium Rate Ranking Historical Trends of Workers Compensation Benefit Historical Trends in Workers Compensation Cases and Average Benefit per Processed Case Historical Trends of Workers Compensation Lost Work Days Historical Growth of Workers Compensation Benefit by Category COMPARISON OF COST CONTAINMENT STRATEGIES Areas for Cost Containment and Cost Drivers Comparison of Medical Cost Containment Strategies Comparison of General Cost Containment Strategies REFORM PROPOSALS AND POLICY RECOMMENDATIONS The DLIR Proposed Legislative Changes Other Proposed Legislative Changes The DLIR Proposed Administrative Rule Changes The DLIR Internal Changes and New Initiatives The Recent Reform to California s WC System Conclusions and Policy Recommendations...65 REFERENCES...68 iii

4 LIST OF TABLES Table 1. Hawaii Workers' Compensation Cost by Category: Table 2. Hawaii Workers' Compensation Cases by Category: Table 3. Hawaii Workers' Compensation Average Cost by Category: LIST OF FIGURES Figure 1. Shares in Total Workers' Compensation Benefit: Average Figure 2. Comparison of WC Loss Ratios...22 Figure 3. Comparison of Average Benefit per Covered Worker...23 Figure 4. Comparison of Hawaii and U.S. WC Average Benefits...24 Figure 5. Hawaii Workers' Compensation Total Benefit...26 Figure 6. Hawaii Reported Workers' Compensation Cases...28 Figure 7. Processed WC Cases with Cost and Reported WC Cases: Figure 8. Average Benefit Per Processed WC Case with Cost: Figure 9. Hawaii Workers' Compensation Days Lost...31 iv

5 EXECUTIVE SUMMARY The workers compensation (WC) program is an important part of American social insurance. In 1915, the Hawaii Territorial Legislature adopted the first WC law in Hawaii. Under this law, employees who were injured or disabled on the job were provided with medical treatment and a fixed monetary compensation. Hawaii s total WC cost (the benefits paid to the injured workers by self insured employers and insurance carriers) increased almost 14 times from about $24 million in 1977 to $343 million in To control this rapid increase in Hawaii s WC cost, Act 234 and Act 261 were passed in 1995 and 1996, respectively. Act 234 set the WC charges at 110 percent of Medicare Medical Fee Schedule and allowed the Director of Hawaii State Department of Labor and Industrial Relations (DLIR) to make adjustments upon determining that specific fees allowed under Medicare were not reasonable, while Act 261 was to establish the Hawaii Employer Mutual Insurance Company (HEMIC) to provide WC coverage not only to high-risk employers, but also to small business employers who were unable to obtain insurance otherwise. The cost of the WC program is covered fully by the employers. The insurance premiums paid by employers are used not only to cover total compensation costs, but also to cover the expenses to administer the system and the profits for insurance carriers. Based on the available data, however, it is not possible to break down total employer costs into administrative expenses and profit of insurance carriers. After 1994, Hawaii s WC costs decreased significantly, but these decreases were not translated into corresponding decreases in total employer costs. From 1994 to 2006, total employee benefits or compensation costs paid by the insurance carriers with active licenses with DCCA (called direct losses paid in the DCCA report) decreased more than half (55 percent) from $243 million to $109 million, while total employer premiums (called direct premiums written) decreased only slightly (less than 2 percent) from $362 million to $356 million. 1 1 In the Report of Insurance Commissioner of Hawaii, both direct losses paid and direct losses incurred values are provided. The incurred costs for any premium year are estimated based upon claims during that year. The direct losses incurred were higher than the direct losses paid in most of the recent years. For example, the direct losses incurred in 2006 was about $140 million, compared to the $109 million direct losses paid in the same year. In this study, the direct losses paid were used to represent the employee benefits received. It should be noted that the insurance premiums received by the insurance carriers are not the total costs of employers due to the deductible option for medical benefits in insurance policy. If an insured employer exercises this option and chooses a deductible, the insured employer shall be liable for the amount of the deductible instead. v

6 The gap between total employers costs and total compensation costs is measured by the loss ratio, which is calculated as the ratio between total employee benefits and total employer costs. During , Hawaii s loss ratio for private insurance carriers was close to that of U.S. private carriers, but the gap increased since In 2005, the Hawaii private carrier loss ratio was only about 57 percent of that of the U.S. as a whole. 2 The large and increasing gap between employer costs and employee benefits for the private insurance carriers (i.e., decline in the loss ratio) in Hawaii can be explained by three possible factors, namely increased administration costs of private insurance carriers, increased reserves retained by insurance carriers to pay for expected future claims, and increased profitability of insurance carriers. 3 The available information does not support the need to increase reserves as the reason that the loss ratio decreased. Thus, the growing gap between employer costs and employee benefits (i.e., declining loss ratio) could be attributed to increased profitability or increased administrative costs or both. A more detailed study is needed to determine the specific reasons for a low and declining loss ratio in Hawaii. According to the Workers Compensation Data Book prepared by DLIR, Hawaii s total WC costs (or employee benefits) can be grouped into nine categories: (1) temporary total disability (TTD), (2) temporary partial disability (TPD), (3) permanent total disability (PTD), (4) permanent partial disability (PPD), (5) death, (6) disfigurement, (7) vocational rehabilitation, (8) attendant services, and (9) medical. Among the nine categories, on average between 1990 and 2006, medical benefit accounted for the largest share (39.4 percent) in Hawaii s total WC costs, followed by PPD (26.0 percent), TTD (23.9 percent), and PTD (5.8 percent). These four categories accounted for more than 95 percent of the total WC cost in Hawaii during Hawaii s total WC employee benefits paid decreased since 1994, but average benefits were still higher than the U.S. as a whole. In 2005, the average WC benefit per $100 of covered wages in Hawaii was about 21 percent higher than that for the U.S. On a per covered worker basis, the difference in benefit between Hawaii and the U.S. was somewhat smaller. In 2005, the total average WC benefit per covered worker in Hawaii was 2 Comparison with the U.S. is for 2005, the latest year for which the national data were available when this report was prepared. 3 Please note that the Hawaii loss ratio is calculated based on the direct losses paid. If the direct losses incurred were used to calculate the loss ratio, the Hawaii loss ratio in 2006 would be 39.2 percent rather than 30.7 percent. vi

7 only about 6 percent higher than for the U.S. However, the average medical benefit per worker was about 15 percent lower in Hawaii. Medical benefits accounted for the largest share of total WC benefits. In 2005, the share of medical benefits in total WC benefits was 38.9 percent in Hawaii, significantly lower than the U.S. average of 48.8 percent. The second highest benefit category in Hawaii was the permanent partial disability (PPD) benefit. In 2002 (the latest year for which the comparable data were available) the share of PPD benefits in total WC benefits was 37.0 percent for the U.S., as compared to 24.3 percent in Hawaii. The third largest benefit category in Hawaii was the temporary total disability (TTD) benefit, accounting for 22.6 percent of total Hawaii WC benefits during In 2002, total temporary disability benefits (including TTD and TPD) accounted for only about 11 percent of total WC benefits in the U.S., as compared to about 25 percent in Hawaii. 4 According to a study prepared by the Council of State Governments, the most commonly adopted strategies of containing medical costs in the U.S. include: (1) employer choice of physician laws, (2) heath care provider networks, (3) medical fee schedules and mandated bill review, (4) treatment guidelines and utilization reviews, (5) case management, and (6) promotion of generic drugs. In addition to the strategies targeted at preventing injuries and decreasing medical costs, there are also some general cost containment strategies. These include: (1) deregulation and competitive premium rates, (2) alternative insurance options such as selfinsurance and pooled insurance, (3) advisory councils, (4) technological innovations, (5) streamlined WC systems for state employees, (6) fraud prevention, and (7) curbing litigation in the WC systems. Some of these strategies are already adopted in Hawaii. This study focuses on recommendations consistent with the goal of minimizing employers costs and improving benefits to injured workers when possible. The following major conclusions and recommendations are provided. 1. The gap between WC employer cost paid and employee benefits received in Hawaii is significantly larger than the national average. In addition, the gap in Hawaii has been increasing over time. Reducing this gap should be the focus of the WC system reform in 4 Inclusion of vocational rehabilitation costs in TDD benefit may have caused the share of TDD benefit in total benefits to be higher in Hawaii than in the U.S. vii

8 Hawaii. The first step toward reducing the gap would be a more detailed analysis to identify the specific reasons for a low loss ratio in Hawaii. 2. The low loss ratio seems to indicate that the WC insurance carriers in Hawaii are either more profitable and/or less efficient than the nation as a whole. According to a study conducted by the Workers Compensation Center, Michigan State University (Welch, 2007), Hawaii ranked the 4th highest in the U.S. in terms of the profitability of WC insurance carriers in The WC insurance carriers return on net worth was estimated at 16.7 percent for Hawaii vs. 9.6 percent for the U.S. as a whole. More detailed studies are needed to determine whether the low loss ratio is due to high profitability among WC insurers in Hawaii or due to other factors, such as increased administrative costs and increased reserves. 3. The enactments of Act 234 in 1995 and Act 261 in 1996 seem to have contributed to control the rapid increase in WC employee benefits in Hawaii since On a per $100 of covered wages basis, Hawaii s average total WC benefit level is higher than the national average. On a per covered worker basis, however, Hawaii s average total benefit is close to the national average, while Hawaii s average medical benefit is below the national average. The share of total temporary disability (TTD) in total benefit is found to be significantly higher in Hawaii compared to the nation. A detailed study is needed to determine as to why Hawaii s TTD share is so high. 5. The two administrative rule changes by DLIR, namely improving the WC hearing process by providing clear directives on the hearing process, and instituting evidencebased medical treatment guidelines by adopting Chapters of the American College of Occupational and Environmental Medicine Practice Guidelines and the Official Disability Guidelines) approved by the Governor in 2005, but later nullified by the Legislature, would have improved the WC system in Hawaii. 6. The DLIR internal changes and new initiatives to improve the WC system in Hawaii should be supported because these changes are consistent with the operating goals of the WC system. Decreases in total WC costs in Hawaii since 2003 may be due to the DLIR internal changes and initiatives to improve the WC system. viii

9 7. Hawaii should consider establishing a labor-management advisory council to minimize the conflict between competitive parties in WC system and to include them in the policymaking process. The Wisconsin s advisory council might be used as a model for Hawaii. 8. The recent reforms to California s WC system have achieved some success in reducing WC costs in that state. Many of the reforms adopted in California have already been adopted in Hawaii, but some measures, especially the measure to establish a more objective permanent disability rating schedule, should be considered.. ix

10 1. INTRODUCTION This study provides an evaluation of Hawaii s workers compensation (WC) system. Section 2 briefly describes the current WC system in Hawaii, including its goals and major components. Employer cost and employee benefit levels are also compared between Hawaii and other states in the U.S. in Section 2. Section 3 analyses the performance of the Hawaii s WC system in terms of two simple questions: (1) is the system facing a crisis and therefore in need of immediate major reforms; and (2) if such reforms are needed, where should we focus our attention. Various WC cost containment strategies adopted in Hawaii and other states are reviewed in Section 4. Recent proposed legislative changes, administrative rule changes, and new initiatives relating to Hawaii s WC system are examined in Section 5. Also included in this section is discussion of the recent reforms to California s WC system. Finally, the last section summarizes the findings and identifies some possible areas of reforms to Hawaii s WC program. The WC program is an important part of American social insurance. The first WC law in the U.S. was enacted in 1908 to cover certain federal civilian workers. For non-federal workers, the WC statutes are enacted and administered at the state level. The first state laws were passed in In 1915, the Hawaii Territorial Legislature adopted the first WC law in Hawaii. Under this law, employees who were injured or disabled on the job were provided with medical treatment and fixed monetary compensation (indemnity). The cost of the WC program is covered completely by the employers. Under Hawaii s current law, all employers, including the State and County governments (the Federal government workers are excluded from the state WC system), employing one or more workers are required to have a workers compensation coverage. In 1972, mandated by Congress, the National Commission of State Workmen s Compensation Laws issued an historical report that changed the face of the WC system. In that report, the commission made nineteen essential recommendations to states for improving their WC systems. Most of these recommendations involved the expansion of coverage and benefits. Many states adopted some or most of the recommended provisions during the 1970s and 1980s. As states adopted the reforms, they also recognized that expanding coverage and benefits would increase costs. By the early 1990s, cost containment became the main focus of reform debates in most states (Victor et al., 1992). In Hawaii, the total WC compensation cost did not increase substantially until After this period until 1994, however, total WC compensation cost 1

11 increased almost 14 times from about $24 million in 1977 to $343 million in After 1994, total WC cost decreased significantly in Hawaii. 5 The rapid growth of WC cost from the late 1970s until the early 1990s caused serious concern among Hawaii s employers, especially small business owners. Under the overwhelming pressure from both Hawaii s small business owners and labor officials, there have been two major attempts in the 1990s to reform the state s WC system. In 1995 Act 234 was enacted to control medical costs by establishing a medical fee schedule, which generally limits the reimbursement rate for medical services at 110 percent over the Medicare rate. This act also provided clear guidelines as to what constitutes fraud and established fraud penalties, and provided employers with incentives for safety and health programs to reduce workplace injuries. In 1996, Act 261 was enacted to establish the Hawaii Employer s Mutual Insurance Company (HEMIC) to provide WC coverage not only to high-risk employers, but also to small business employers who were unable to obtain insurance otherwise. In recent years, further reforms to Hawaii s WC system have been proposed. Since 2003, the DLIR has made the WC system reform a high priority and implemented various programs, including: (1) identifying the cost drivers and areas for improvement, (2) improving DLIR s internal operations, and (3) recommending legislative proposals to reform Hawaii s WC Law. The DLIR submitted an omnibus WC reform package to the 2004 and 2005 Legislatures that addressed several key cost drivers identified by its internal study. Both omnibus bills were rejected in their entirety by the Legislature (DLIR, 2007). Besides DLIR s proposals, other legislative proposals to reform the WC system have also been considered. The major legislative proposals are summarized in Section 5 of this study. 5 The compensation cost, also referred as employee benefits in this study, is the cost incurred to cover the medical expenses and cash benefits paid out to the injured workers. The compensation cost is, however, only part of total employer cost. The employer cost also includes the administrative costs and profits of the insurance carriers. Since information on total employer cost is not available in Hawaii, compensation cost is used in this report. 2

12 2. DESCRIPTION OF WORKERS COMPENSATION SYSTEM AND COMPARISON OF BENEFIT LEVELS 2.1. The Goals of the Workers Compensation System The WC system was introduced to provide medical and financial assistance to workers injured or disabled on the job. The commonly cited goals of the WC system in the WC literature include: (1) promote injury prevention, (2) provide timely and quality medical service to the injured workers, (3) provide adequate and equitable benefits for injured workers, (4) provide timely and non-litigious delivery of benefits, (5) promote speedy return to work, and (6) control the cost of administering the system, which is paid by the employers (Victor et al. 1992). Obviously, some of these goals are contradictory. For example, increasing benefits to the injured workers would increase the employers cost. As a result, policy makers and administrators of the system often face a trade-off between the conflicting goals of the system. Typically, the WC system involves four major parties: (1) the injured workers, who directly benefit from this system, (2) the employers, who pay for the costs of the system, (3) the third party (including the insurance carriers, the medical service providers, and the attorneys), who facilitate and manage the delivery of benefit and the operation of the system and may indirectly benefit from the system (generate revenue and profit from services provided), and (4) the policy makers, government administrators, and officers in charge of the operation of the system. In this study, the injured workers and employers are designated as the primary parties. Although the WC system is not intended to be profit-driven, some third parties do profit from the system, sometimes at the expense of the primary parties. Two main operating goals of the WC system are used to evaluate proposed changes in this study. The first one is to maximize the injured workers benefit without increasing the cost to the employers. The second one is to minimize the employers cost without decreasing the benefits to the injured workers. To the degree that the policies are able to achieve both of these goals there is a win-win case of reducing the employer cost and increasing the benefit to injured workers. It should be noted that there is a large gap between the employers cost and the benefit received by the injured workers. For example, in 2006, the total WC premiums paid by the employers (employer cost) covered by the insurance carriers with active license with the State of 3

13 Hawaii Department of Commerce and Consumer Affairs (DCCA) totaled about $356 million. However, in comparison, the losses, claims and benefits paid by the insurance carriers to the injured workers (employee benefit received) totaled only about $109 million. This was only 30.7 percent of total employers cost. In reality, the actual benefits received by the injured workers can be even lower than the reported benefits because some of the cash benefits they receive are used to pay for attorneys and other litigation expenses. An attorney may charge an injured worker up to one-third of the cash benefit received. Therefore, the actual gap between the employer cost and the employee benefit may be even larger. This gap represents the administrative costs, such as claim management expenses, other operating expenses, taxes, and profit margins of the insurance carriers. Reducing this gap is consistent with the operating goals defined in this study. This study focuses on recommendations consistent with the goal of minimizing employers costs and improving benefits to injured workers when possible. When the comparable data are available, the WC cost and benefit levels are also compared between Hawaii and other states in the U.S. However, the intent is not to imply that a certain level of benefit or cost is ideal. Determining the reasonable level of benefit is a policy issue which is beyond the scope of this study. Therefore such issues as should we increase the indemnity benefits or should we increase or decrease the allowed number of treatments per injury are not being addressed in this study. Although important, the answers to these issues are often more political than economic. Against this backdrop, the following is a description of the Hawaii s WC system and a comparison of cost and benefit levels between Hawaii and other states Description of the Hawaii Workers Compensation System and Comparison of Benefit Levels General Description of the WC System The WC system provides benefits to workers who are injured on the job or contract a work-related illness (to be referred as injured workers hereafter). Before the WC laws were enacted, an injured worker s only legal remedy for a work-related injury was to bring a tort suit against the employer and prove that the employer s negligence caused the injury. Under the tort system, workers often did not recover all damages and always experienced delays or high costs. The employers were also at risk for substantial and unpredictable losses if the workers lawsuits 4

14 were successful. Moreover, litigation created friction between employers and workers. Ultimately, both employers and employees favored legislation to insure that an injured worker would receive predictable compensation without delay, irrespective of who was at fault. Under the exclusive remedy concept, the worker accepts workers compensation as payment in full and gives up the right to sue the employer (Sengupta et al., 2007). Therefore, the creation of the WC system reflects a balance of two conflicting interests, thereby creating a win-win situation for both the employees and the employers. The WC programs are designed and administered by individual states. The programs vary across states in terms of who is allowed to provide insurance, which injuries are compensable, and the level of benefits paid to the affected workers. Generally, the state laws require employers to obtain insurance or prove that they have the financial ability to carry their own risk (self-insurance). The WC data provided by the National Academy of Social Insurance (NASI) include benefits under three types of insurers: (1) private carriers, (2) state funds, and (3) self-insured. In 2005, total benefits paid by private carriers, state funds, and self-insured employers accounted for 54.0 percent, 20.7 percent, and 25.3 percent, respectively, of total WC benefits paid in the U.S. (Sengupta et al, 2007). Hawaii has no WC state fund. The state and county employees are included in the self-insured category. The Workers Compensation Special Compensation Fund (SCF), which may have been treated as the state fund in the NASI study, was originally established as a second injury fund to cover delinquent employers. However, with enactment of the Benefit Adjustment provision under HRS in 1980 to provide cost of living adjustments to permanently and totally disabled recipients every 10 years, over 50 percent of SCF payments currently go to this benefit (DLIR, 2008). In Hawaii, the Disability Compensation Division (DCD) of the DLIR is primarily responsible for the administration of WC program in the state. The DCD is composed of four primary branches, namely Cost Review Branch, Hearings Branch, Enforcement Branch, and Records and Claims Branch. The Cost Review Branch reviews and monitors health care providers and their treatment plans to ensure that the medical care and services provided are necessary and appropriate. The Hearings Branch is responsible for conducting informal hearings and adjudicating disputes over treatment plans and other health care provider disputes. The Enforcement Branch enforces compliance with the WC law (mostly focusing on insurance coverage) through its investigation section. The Records and Claims Branch is further divided 5

15 into three sections, viz., Insurance Section, Vocational Rehabilitation Section, and Facilitator Section. The Insurance Section manages insurance policies, endorsements, expirations and cancellations, and employer compliance with insurance coverage requirements. The Vocational Rehabilitation Section is responsible for reviewing and approving rehabilitation providers plans for injured workers, certifying rehabilitation agencies, and referring workers to rehabilitation providers and monitoring worker progress. The Facilitator Section responds to inquiries from workers, insurers, employers, providers, and attorneys, and educates workers on their rights and benefits under the law. Disputed issues can be resolved voluntarily without the intervention of the DCD. To prevent unnecessary disputes, the DCD provides certain types of information to help constituents understand their rights and responsibilities under the law. Two WC facilitators and a clerk located at DCD headquarters provide information and assistance to unrepresented workers, employers, insurers, service providers, union agents, and attorneys. Disputes that cannot be resolved voluntarily can be resolved through the DCD s dispute resolution process, through the administrative appellate review process at the Labor and Industrial Relations Appeals Board (LAB), and ultimately by the Hawaii Supreme Court. The LAB consists of three board members appointed for 10-year terms by the Governor, with the advice and consent of the Senate. Hawaii is one of a handful of states (along with Nevada, New York, and Ohio) that hold informal hearings to resolve WC disputes. Informal hearings enable the DCD to conduct over 2,500 hearings annually to resolve disputes. The DCD currently has 23 hearings officer positions statewide. Formalizing the process will result in longer hearings, more legal requirements for a formal record and will result in requiring many more hearings officers to maintain a current workload. Parties usually use Form WC-77 (Request for Hearing) to request an informal hearing. Once a request for hearing is filed, staff members in the DCD s hearing branch review the case file and request medical records and other documentation. When the file is complete, a scheduler prioritizes cases. Priority hearings are usually set about six weeks in the future. The purpose of a hearing is to resolve an issue by agreement or decision. Based on DCD data, about 55 percent of workers are represented by an attorney at the initial hearing. In calendar year 2004, the DCD held 2,614 hearings, accounting for about 4.1 percent of WC cases in that year. WC settlements arising out of alternative dispute resolution must be approved by the DCD. The DCD approves approximately 7,000 settlements annually. These settlements are 6

16 agreed upon without the DCD intervention and are reviewed by the DCD to ensure compliance with the WC law. Compared with other states, the initial indemnity payments are relatively prompt in Hawaii. According to a study by the Worker s Compensation Research Institute (Ballantyne, 2006), the median interval from the date of injury to the first indemnity benefit payment in Hawaii was 18 days in 2001, compared with 30 days for the median to 40 jurisdictions. Hawaii tied with Oregon in having the shortest median interval. Overall, the speed of dispute resolution in Hawaii is faster than in the typical state that the WCRI has studied in the past 10 years. The average interval from the request for a hearing to a hearing and decision was 162 days (5.3 months) in Hawaii in This interval included an average of 50 days from filing the hearing request to the transferring the case to the DCD s review section, an additional 71 days to a hearing being held, and another 41 days for the decision to be issued after a hearing. The 5.3-month interval in Hawaii was shorter than in seven of nine other states (for which comparable data were available) that have been the subject of WCRI Administrative Inventories in the past 10 years (Ballantyne, 2006). Appeals to DCD hearing officers decisions are reviewed by the LAB. Most of these appeals are settled, dismissed, or withdrawn without a trial being held. In fiscal year 2004, 646 appeals were filed with the LAB, but only 60 trials were held. If the case goes to a trial, the LAB usually conducts a trial de novo based on the presentation of documentary and testimonial evidence, briefs, and new evidence not heard at the initial hearing. The LAB does not rehear the case; rather, it reviews the proposed decision and any exceptions and either adopts or amends the proposed decision based on the evidence presented. Further appeals can be taken to the Hawaii Supreme Court. In fiscal year 2004, 29 appeals were filed with the Hawaii Supreme Court (Ballantyne, 2006). In Hawaii, the Insurance Commissioner at the Department of Commerce and Consumer Affairs (DCCA) is responsible for approving the rate and classification of all WC insurers in the state. The WC program is financed almost exclusively by employers. The premiums paid by employers are based in part on their industry classifications and the occupational types of their workers. Many employers are also experience-rated, which can result in higher (or lower) premiums. The employer cost of WC program is not only affected by the benefits received by 7

17 the employees, but also by other factors, such as schedule rating, dividends, administrative expenses to manage the system, and profits of insurance carriers. The gap between employer cost and employee benefit is commonly measured in terms of a loss ratio, which is defined as the ratio between total employee benefits and total employer costs. In 2005, the loss ratio was 62.3 percent for the U.S., meaning that nearly 40 percent of the employer costs were used to administer the system or account for the profit of insurance carriers. The loss ratios tend to vary substantially across different insurance carriers. For example, in 2005 the loss ratios for private carriers, state funds, and self-insured employers in the U.S. were 55.2 percent, 59.1 percent, and 84.2 percent, respectively (Sengupta et al., 2007). 6 Private carriers tended to have the highest gap between benefits and costs, while self-insurers had the lowest gap. For Hawaii, due to lack of data, only the loss ratio of private insurance carriers with active licenses with DCCA could be calculated. As mentioned before, the loss ratio for these carriers in Hawaii was only 30.7 percent in 2006, nearly half of that for the nation. 7 During , Hawaii s loss ratio for the private insurance carriers was close to that of the U.S. private carriers, but the gap increased since In 2005, the Hawaii s private carrier loss ratio was only about 57 percent of that of U.S. 8 The large and increasing gap between employer costs and employee benefits for the private insurance carriers (i.e., decline in the loss ratio) in Hawaii can be explained by three possible factors, namely increased administration costs of private insurance carriers, increased reserves retained by insurance carriers to pay for expected future claims, and increased profitability of insurance carriers. Although we cannot identify the specific reasons for the increasing gap due to limited data, some observations can be made from the available information. First, according to the data from the Workers Compensation Center, Michigan State University (Welch, 2007), in terms of the profitability of WC insurance carriers, Hawaii ranked the 4 th highest in the U.S. in The 6 In Hawaii, there is no WC state fund and state and county employees are included in the self-insured category. 7 It should be that if the direct losses incurred (the estimated costs based upon claims during the year) rather than the actual direct losses paid during the year were used to calculate the Hawaii loss ratios, the 2006 Hawaii loss ratio would be 39.2 percent, but this value is still significantly lower than the national average. 8 Comparison with the U.S. is for 2005, the latest year for which the national data were available when this report was prepared. 8

18 return on net worth of WC insurance carriers was estimated to be 16.7 percent for Hawaii, as compared to 9.6 percent for the U.S. These statistics suggest that higher profitability of insurance carriers is, perhaps, one of the reasons for a lower loss ratio in Hawaii. Second, according to the data provided by DCCA, from 2000 to 2006, the total incurred losses (the estimated costs based upon claims) were about 22 percent higher than the total actually paid losses. In addition, the estimated incurred losses were higher than the actually paid losses in almost every year. With the number of WC claims decreasing over this period, higher estimated incurred losses than actually paid losses should mean increased reserves retained by insurance carriers to pay for expected future claims. It is unlikely that a large gap between employer costs and employee benefits in Hawaii is due totally to the increased reserves retained by insurance carriers and high profitability. The administrative and legal costs may have also increased for various reasons. The lack of data, however, has prevented further analyses to estimate increases in administrative costs and identify specific reasons for it. Every state in the U.S., except for Texas, mandates WC coverage for almost all private employees (U.S. DOL, 2005). Certain categories of workers, such as those in very small firms, certain agricultural workers, household workers, employees of charitable or religious organizations, or employees of some units of state and local governments are exempt from the mandatory coverage. Employers with fewer than three to five workers are also exempt in fourteen states. According to the NASI, all workers and wages covered by unemployment insurance (UI) in Hawaii are covered by the WC system, as compared to 97.3 percent in the U.S. Once a worker reports an injury on work, the employer is required to file a WC-1 Form whether there is agreement that the injury is work related or not. To be compensated by the WC system, the injured workers must demonstrate that the injury is work related. It is possible that a reported WC case may incur no cost to the WC system. The injured worker may fully recover without using any WC benefit, or the case may be cancelled later if the injury was determined to be not work related. If the employer denies the claim, the worker can file a WC-5 Form requesting the benefit. To determine whether the case should be covered by the WC system or not, the worker and the employer should provide their evidence and arguments in front of a WC Hearings Officer of DLIR. 9

19 Although the DCD does not differentiate whether a condition is a work-related injury or work-related illness, in practice, a work-related injury case is easier to verify than a work-related illness case. An injury is often caused by an accident. The employer can check the time and the place of the accident to determine whether it is work related or not. Unfortunately, it can often be difficult to determine whether an injury is indeed work-related. For example, a worker who injured his arm in a tennis game over the weekend could fall at work (by accident or on purpose) and report the condition as work-related. In this case, it would be very difficult for the employer to deny the WC coverage. This is a problem of the WC system with no simple solutions. The determination of whether an illness is work-related illness can be even more complex. For example, a neck pain may be work related or due to other reasons (such as aging). Since illnesses can be developed over time, it is difficult for the employer to determine the nature (work related or non-work related) of the illness by simply checking the timing and place of the illness. It should be noted that Hawaii has two state-mandated programs providing benefits to workers injured off-the-job, namely non-occupational temporary disability insurance (TDI) and the prepaid health care insurance (PHC). The employer-paid TDI program provides partial wage-loss benefits to employees who suffer off-the-job injuries or illnesses. Under the TDI program, if the carrier accepts the claim, the worker is entitled to 58 percent of his or her average weekly wage for up to 26 weeks. Under the PHC program, employers must provide covered employers with health care benefits for hospitalization, surgery, medicine, diagnostic tests, and maternity benefits (Ballantyne, 2006). In Hawaii, if the compensability of a work-related claim for the WC benefit is being disputed, the worker would get TDI and PHC benefits initially. If the claim is determined to be compensable under the WC law, the TDI and PHC carriers would have rights to recover TDI or PHC benefits covering the costs they incurred. The WC system pays for medical care for work-related injuries immediately after the injury occurred and pays cash benefits for lost work hours after three to seven days of the injury. Most WC cases do not involve lost work hours longer than the waiting period of 3-7 days to receive cash benefits. In these cases, only medical benefits are paid. According to available information covering insured employers in 41 states in the U.S. for , the medical only cases accounted for 77 percent of total WC cases, but they accounted only for 6 percent of total benefits paid (Sengupta et al., 2007). Cash benefits differ according to the duration and 10

20 severity of the injury. As discussed before, the medical and cash benefits are only part of the total employer cost. These benefits are defined as compensation cost in this study. Based on the statistics in Hawaii s Workers Compensation Data Book prepared by the DLIR, the Hawaii WC program can be grouped into the following nine categories or subprograms: (1) temporary total disability (TTD), (2) temporary partial disability (TPD), (3) permanent total disability (PTD), (4) permanent partial disability (PPD), (5) death, (6) disfigurement, (7) vocational rehabilitation, (8) attendant services, and (9) medical. As shown in Figure 1, among these nine categories, medical benefits accounted for the largest share of total benefits in Hawaii (39.4 percent), followed by PPD, (26.0 percent), TTD (23.9 percent), and PTD (5.8 percent). These four benefit categories accounted for more than 95 percent of the total WC benefits in Hawaii during Figure 1. Shares in Total Workers' Compensation Benefit: Average Medical: 39.4% PPD: 26.0% TTD: % PTD: 5.8% Other: 4.9% Medical Benefits In 2006, the share of medical benefits in total WC benefits was 38.9 percent in Hawaii, almost the same as the average share during (39.4 percent). For the U.S. total non- 11

21 federal workers, the share of medical benefits in total WC benefits was 48.8 percent in 2005, as compared to 39.3 percent for Hawaii for that year. Under the Hawaii s current law, all medical and related expenses (including the parking fee) incurred in treating the injured workers under the coverage are paid by the insurer or selfinsurer. The statute also allows insurers to write WC insurance policies allowing employer deductible for medical benefits. However, no data were available to determine how many of such policies exist in Hawaii. The employee chooses the attending physician (the primary doctor of the injured worker) in Hawaii. The attending physician can be a medical doctor, a dentist, a chiropractor, an osteopath, a naturopath, a psychologist, an optometrist, and a podiatrist. The worker must select an attending physician from those practicing on the island where the injury occurred. If the services of a specialist are required, the employee can select any physician or surgeon practicing anywhere in the state. A worker can change the attending physician once but must notify the insurer or self-insurer. To make any subsequent change, the worker must obtain permission from the insurer or self-insurer. The DCD can order a change in an attending physician or a physical examination if a provider is chosen by the DCD (Ballantyne, 2006). There are very detailed rules regarding the type and amount of medical services that can be used. For example, the current law allows for fifteen medical treatments and twenty visits to therapists per injury for the first sixty days. To continue treatment beyond that period, the attending physician must submit a treatment plan to the insurer or self-insurer at least 7 days prior to the next treatment. The insurer or self-insurer can object to the treatment plan at any time. However, the insurer or self-insurer must pay for treatments completed prior to the objection. Each treatment plan can last 120 days and for every 120 days of additional treatment, the attending physician must submit a new plan. The number of treatment is limited to fifteen within the 120-day period. If necessary, the attending physician can make referrals to other specialty health care providers (chiropractors, massage therapists, naturopaths, etc.) for treatment that the attending physician is unable to perform. The referrals are limited to a period of 60 days or a maximum of fifteen visits, whichever occurs first, and cannot be made to any persons or companies that the attending physician has a financial interest in them (DLIR, 2004). In addition, the current medical fee schedule established by Act 234 limits the reimbursement for medical services at 110 percent over the Medicare rate. 12

22 In case of medical bill disputes, the parties involved have 30 days to negotiate and resolve the disputes. Thereafter, any party may request a summary decision by the DCD s cost review branch. The insurer or self-insurer can deny treatment within the first 60 days or in the treatment plan. If the provider or employee disagrees, the party can request a hearing. Permanent Partial Disability (PPD) Benefits The second largest benefit category in Hawaii is the permanent partial disability (PPD) benefit, which accounted for 26.0 percent of total WC benefit from 1990 to In 2002 (the latest year for which the PPD benefit data were available for comparison), the share of PPD benefits in total WC benefits was 37.0 percent for the U.S., significantly higher than 24.3 percent for Hawaii in that year. Once an injured worker attains the point of stability or maximum medical recovery possible, the worker may be sent to a physician to evaluate the extent of any permanent impairment. The evaluation is used to determine the extent of the disability, which in turn determines the amount to be paid to the employee for that disability. This is called a PPD award. PPD award is an indemnity benefit and is payable even if the worker returns to work. States differ in their methods for determining whether a worker is entitled to PPD benefits, the degree of partial disability, and the amount of benefits to be paid (Barth and Niss, 1999; Burton, 2005). Cash benefits for PPD are frequently limited to a specified duration or a lump sum dollar amount. In Hawaii, except for medical benefit and vocational rehabilitation benefit, all other benefit categories are indemnity benefits. An indemnity benefit is calculated by multiplying a weekly benefit rate by the number of weeks allowed. The weekly benefit rate for PPD (both scheduled and unscheduled) is the state s maximum weekly benefit amount set at 100 percent of the state s average weekly wage (AWW) determined annually (on January 1) by the DLIR. In 2006, the maximum weekly benefit for PPD, TTD, TPD, and PTD was $654. The number of weeks allowed is based on the impairment rating, subject to the maximum number of weeks allowed for the body part. Since the PPD award is directly related to the severity of the disability, the injured workers have incentive to exaggerate the extent of their disability. Methods for compensating permanent impairments fall into several categories (Barth, 2004). Approximately 43 WC jurisdictions use a schedule a list of body parts that are covered. Typically, a schedule appears in the underlying statute, which lists benefits to be paid (the 13

23 number of weeks allowed) for specific losses, for example, the loss of a finger. These losses invariably include the upper and lower extremities and may also include an eye. In most states, the schedules also include the loss of hearing in one or both ears. Injuries to the spine that are permanently disabling are typically not included, nor are injuries to internal organs, head injuries, and occupational diseases (Sengupta et al., 2007). In Hawaii, a schedule is included in Section , Hawaii Revised Statutes (HRS). The schedule includes upper and lower extremities, an eye, and the loss of hearing in one ear or both ears. The scheduled PPD benefit is calculated as the number of weeks allowed as specified by the schedule times the maximum weekly benefit amount. The PPD benefit is paid weekly at 66 2/3 percent of the workers AWW or the maximum weekly benefit amount whichever is lower until the total PPD benefit is paid. For example, a worker who lost a foot is entitled to 205 weeks of benefits. With the maximum weekly benefit amount at $654 in 2006, the total PPD benefit will be $134,070. The total benefit is independent of the worker s actual wage rate. If the worker s AWW is $600 a week, the benefit is paid out at the rate of $400 per week (66 2/3 percent of $600) for weeks ($134,070 divided by $400) (Ballantyne, 2006). For conditions not listed on the schedule, four methods are used to determine the PPD benefits: An impairment-based approach is used in 19 states, including Hawaii. In 14 of those states, the worker with an unlisted PPD receives a benefit based entirely on the degree of impairment. Any future earnings losses of the worker are not considered. In Hawaii, unlisted PPD situations are rated as a percentage of the total loss or impairment of a physical or mental function of the whole person. The maximum compensation is computed on the basis of that impairment percentage of 312 weeks times the effective maximum weekly benefit rate. For example, if an injured worker is assigned 10 percent of PPD and the effective maximum weekly benefit rate is $654, then the total PPD benefit will be $20,404.8 (10% x 312 weeks x $654/week = $20,404.8). The statute currently mandates the use of the fifth edition of the American Medical Association s (AMA) Guides to the Evaluation of Permanent Impairment when rating permanent partial disability. In practice, PPD benefits are initially rated according to the AMA Guides, and then additional percentage points (typically from 1 to 7 points) are added, depending on the magnitude of the impairment rating. Initial PPD ratings are usually 14

24 provided by defense medical experts. Most workers attorneys reported that they usually ask the treating physician if the initial rating is fair, rather than obtain another expert opinion. Relatively little litigation transpires over the amount of PPD benefits in Hawaii. The amount is usually resolved by a stipulated settlement agreement between the parties, which closes out future liability for indemnity benefits in the form of a lump-sum payment and leaves medical benefits open (Ballantyne, 2006). A loss-of-earning-capacity approach is used in 13 states. This approach links the benefit to worker s ability to earn or to compete in the labor market and involves a forecast of the economic impact that the impairment will have on the worker s total future earnings. In a wage-loss approach, which is used in 10 states, benefits are paid for the actual or ongoing losses that a worker incurs. In some states, the PPD benefit begins after maximum medical improvement has been achieved. In some cases PPD benefits can simply be the extension of temporary disability benefits until the disabled worker returns to work. In a bifurcated approach used in 9 states, the benefit for a PPD depends on the worker s employment status at the time that the worker s condition is assessed, after the condition has stabilized. If the worker has returned to work with earnings at or near the pre-injury level, the benefit is based on the degree of impairment. If the worker has either not returned to work or has returned but offered lower wages than before the injury, the benefit is based on the degree of lost earnings (Sengupta et al., 2007). Due to the complexity of the methodologies used by each state to determine PPD benefits, comparison of benefit levels is difficult. Based on a report published by the Council of State Governments (Melissa and Khodeli, 2004), among the 33 states with PPD benefit duration limits in 2003, only 8 states had a benefit duration limit lower than Hawaii s benefit duration limit of 312 weeks. The benefit duration limit varies from a low of 200 weeks in Ohio to a high of 1,500 weeks in North Dakota. Among the 50 states that had maximum weekly PPD benefits in 2003, 31 states had lower maximum weekly benefits than Hawaii s maximum weekly benefit of $580. The maximum weekly benefit varied from a low of $150 in Puerto Rico to a high of $1,018 in New Hampshire. 15